Gambling show celebrates hot streak

Casino-industry players gather near end of very good year

By

WilliamSpain

LAS VEGAS (MarketWatch) -- As the casino industry gathers for the Global Gaming Expo, its annual convention and trade show here this week, gambling companies large and small can celebrate a year in which they have pretty much run the table by virtually every measure.

They picked a good week: Las Vegas is packed, room rates are at or near all-time highs and most of the top resorts are sold out for the night, unusual for a Monday. (Those that aren't have raised their prices to a level that could make a New York or even London hotelier green with envy.) MGM Mirage's
MGM, -3.42%
Monte Carlo wants a cool $500 for the evening, nearly 10 times what the same room would go for a week later.

Even the grubbier Strip properties are raking it in. Aztar Corp.'s ancient Tropicana -- slated for eventual demolition and thus lacking in recent maintenance -- is going for $259.

The share of revenue companies derive from nongambling sales -- food, beverage, entertainment and so on. -- also continues to climb, insulating the house from those occasional late-quarter streaks of bad luck known to blow a hole in profit projections. Edibles seem to have become a particular profit center. The cheap buffet still exists here and there, but on the Strip, ballpark-style price tags on everything from croissants to hot dogs have become the norm.

With few exceptions, the public casino operators turned in third-quarter numbers in line or above Wall Street expectations. Brisk levels of play, along with sky-high average daily rates, growing revenue per available room and occupancy rates routinely running in excess of 90% produced some well-received upside surprises.

If the big operators have any worries about a slowdown in the short or long term, they sure aren't showing it, as their future plans are among the most ambitious yet. MGM Mirage is forging ahead with its CityCenter project, a $5 billion mixed-use monster on the Strip that will boast 18 million square feet of casino, hotel, condominium and retail space. That is roughly six times the size of the company's flagship Bellagio, and when complete, it will be the most expensive privately funded project in U.S. history.

Also, earlier this year, Boyd Gaming Corp.
BYD, -4.50%
unveiled plans for Echelon Place, a $4 billion development set to break ground after it tears down the Stardust.

Immune to consumer slowdowns

So just how much more can Sin City profitably build out?

"There have been a number of waves of capacity additions, and pretty much every time there has been concern that this it," according to Matthew Jacob, an analyst with Majestic Research. "But every single time, demand has outgrown supply. Each new wave brings something new to the market, and when a new casino opens it just drives more demand."

Even national worries about slowing consumer spending are generally waved off, he said: "The viewpoint has been that the casino sector is very resilient or even immune from consumer slowdowns."

About the only fly currently in the ointment has been the relatively disappointing results from the locals market, he added.

"The Las Vegas locals market seems to be having a lot more trouble in this environment," Jacob said. "There has been a lot of capacity added." Station Casinos Inc.'s
STN, -0.13%
Red Rock, which opened earlier this year, "has been doing well but it is cannibalizing Station's other properties. But Las Vegas is still growing so fast that at some point that capacity will be absorbed."

One big question mark is if the growing trend toward private-equity bids and buyouts in the gambling and hospitality sectors might stunt some of the expansion. By way of example, on Oct. 17, Aztar
AZR, +8.70%
shareholders agreed to a takeover by Columbia Sussex. But the biggest possible deal yet came just two weeks before that, when Harrah's Entertainment Inc.
HET, +0.00%
said that it received a $15 billion buyout offer from Apollo Management and Texas Pacific Group.

"The ultimate impact of the going-private trend remains to be seen," said Joe Weinert, a vice president at Spectrum Gaming, a consultancy. "On the one hand, there is a fear that private companies may not be as expansion-minded or as growth-oriented as public companies. On the other, private companies don't have to worry about the sometimes myopic mindset of Wall Street."

It could, at least for a while, "cause a stall in the capital investment plans of some companies," he added. "Harrah's, for instance, could delay finalizing its master plan for Las Vegas and Atlantic City while it sorts out this situation. Other companies that might consider going private could similarly put any major investment plans on hold."

International expansion soars

One thing that is definitely not on hold is international expansion. Harrah's and other operators have deals in the works in multiple countries, form Slovenia to Singapore, but the crown jewel of them all is Macao, which is expected to shortly overtake the Strip in annual gambling revenue.

When Las Vegas Sands Corp.
LVS, -6.24%
reported its third-quarter earnings two weeks ago, the company credited extraordinary levels of table play in the Chinese territory for much of its 22% profit spike. Through the end of September, year-over-year gross gaming revenue from table games in Macao jumped by more than 50% -- three times faster than that in the rest of the market.

"In the month of September, despite the addition of incremental capacity in the marketplace, we maintained our overall market share, continuing to capture over 21% of the table game market in Macao," said Chief Operating Officer William Weidner at that time. The company also is getting ready to open another facility in the Chinese city, the Venetian Macao, which it bills as the largest gambling hall in the world.

Wynn Resorts Ltd.
WYNN, -3.29%
is up and running in the market as well while MGM Mirage will roll out its own property there next year.

Online-gambling ban takes a toll

One source of possible growth that the big names had been eyeing seems to have crapped out, at least for the foreseeable future, is online gambling. Many top industry leaders, among them MGM Mirage's Terry Lanni, had been agitating to get Internet wagering legalized and regulated so they could get their share of the billions of dollars that were going offshore.

That hope, always a long shot at best, has pretty much been crushed by the recent passage of federal legislation that not only didn't loosen the restrictions, but tightened them to the point where even many of the overseas companies will no longer take online bets from American gamblers.

Executives at those companies who did in the past may be sparse on the ground at this week's festivities. The recent arrest of former BetonSports.com Chief Executive David Carruthers as he was changing planes in Dallas has made most, if not all of them, unwilling to visit the United States under current circumstances.

While the Democratic takeover of Congress has raised some optimism that there might be progress, at least one e-gambling expert doesn't think so.

"Anytime you have antigambling legislation passed, it is very difficult for a legislator to seek a repeal," said Anthony Cabot, a partner at Las Vegas law firm Lewis and Roca.

The public-relations price for being tagged as pro-gambling is just too high, he continued: "Even the person who introduced the bill [to legalize gambling in Nevada] got voted out of office."

He believes that one immediate consequence will be "far less participation in land-based poker tournaments, since the majority of the players come from online tournaments. The World Series of Poker will be interesting to watch next year."

The new law and Carruthers' arrest are also muting turnout at the convention, although a representative for the American Gaming Association was quick to point out that overall exhibitor and visitation levels are still expected to be higher than last year.

"We've had about five companies out of 15 drop out on the exhibitor side, but our [Internet] pavilion is still robust," said spokeswoman Holly Thomsen. "On the attendee side, it's hard to gauge the impact. ... We're sure there will be some drop-off as well based on what's going on."

She noted that the trade show has never allowed actual e-gaming companies to exhibit; their suppliers were permitted.

But "for every measurement benchmark -- square footage, show preregistration, conference pre-registration, etc. -- we are tracking way up so far."

By the numbers to date, attendee registration is running 10% of the 2005 event while there are 780 exhibitors, up from 700, and 322,000 square feet of space will be sold compared with 280,000 last year.

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